Composition Scheme under GST – Eligibility & Benefits

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Composition Scheme under GST – Eligibility & Benefits

The Goods and Services Tax (GST) has simplified India’s indirect tax system by replacing multiple state and central taxes. However, for small businesses, filing monthly GST returns and maintaining detailed records can be time-consuming. To ease their compliance burden, the government introduced the Composition Scheme under GST.

The GST Composition Scheme allows small taxpayers to pay tax at a fixed, lower rate and file quarterly returns, instead of monthly ones. It’s an excellent option for small traders and service providers who want to focus on running their business without getting overwhelmed by complex GST procedures.

1. What is the Composition Scheme under GST?

The Composition Scheme is a simplified tax scheme designed for small taxpayers. Instead of paying GST at normal rates (5%, 12%, 18%, or 28%), eligible businesses can pay tax at a nominal rate based on their turnover.

Under this scheme:

  • The taxpayer cannot claim Input Tax Credit (ITC).

  • They cannot issue tax invoices to customers.

  • They must mention “Composition Taxable Person” on all invoices and signboards.

This scheme helps small businesses reduce compliance costs and improve ease of doing business.

2. Eligibility Criteria for Composition Scheme

To opt for the Composition Scheme, a taxpayer must meet the following eligibility conditions:

✅ Turnover Limit:

  • For most states – Annual turnover should not exceed ₹1.5 crore.

  • For North-Eastern states and Himachal Pradesh – Limit is ₹75 lakh.

✅ Type of Business Eligible:

  • Manufacturers (excluding tobacco, ice cream, and pan masala)

  • Traders (dealers of goods)

  • Restaurants (not serving alcohol)

  • Service providers with turnover up to ₹50 lakh (as per new rules)

✅ Other Conditions:

  • Cannot supply goods through e-commerce platforms like Amazon or Flipkart.

  • Cannot engage in inter-state outward supplies.

  • Cannot supply goods exempted from GST.

  • Must be registered under the same PAN for all business locations.

3. Tax Rates under Composition Scheme

Type of Business GST Rate under Composition Scheme
Manufacturers & Traders 1% of turnover
Restaurants (not serving alcohol) 5% of turnover
Service Providers 6% of turnover

These lower tax rates make the scheme very attractive for small businesses.

4. Benefits of Composition Scheme under GST

✅ 1. Reduced Compliance Burden

Composition taxpayers need to file only one quarterly return (CMP-08) and an annual return (GSTR-4), unlike regular taxpayers who must file monthly GSTR-1 and GSTR-3B.

✅ 2. Lower Tax Liability

The GST rate under the scheme is much lower than standard rates. This means reduced tax payment and better cash flow for small businesses.

✅ 3. Ease of Doing Business

With simplified return filing, fewer records, and no ITC reconciliation, business owners can save time and focus more on growth rather than paperwork.

✅ 4. Improved Working Capital

Since tax is paid at a lower fixed rate on turnover, businesses can maintain better liquidity and manage expenses efficiently.

✅ 5. Encourages Formalization

The Composition Scheme motivates small businesses to get registered under GST and become part of the formal economy. This enhances credibility and helps in expanding business operations.

5. Limitations of Composition Scheme

While the scheme offers many benefits, there are some restrictions:

🚫 Cannot claim Input Tax Credit (ITC)
🚫 Cannot issue tax invoices
🚫 Cannot make inter-state sales
🚫 Not suitable for businesses with a high input cost
🚫 Must pay tax even on exempt supplies

Hence, before opting for the scheme, businesses should evaluate their turnover, input credit needs, and future growth plans.

6. How to Apply for the Composition Scheme

Businesses can opt for the Composition Scheme in two ways:

  1. New Registration:

    • Select “Opt for Composition Scheme” while registering for GST on the portal.

  2. Existing GST Holders:

    • File Form GST CMP-02 before the start of the financial year to switch to the composition scheme.

Once opted in, the taxpayer must file Form CMP-08 quarterly and GSTR-4 annually.

7. Example of Composition Scheme Calculation

Suppose a trader has an annual turnover of ₹60 lakh.
Applicable GST rate = 1% under Composition Scheme.

Tax Payable = 1% of ₹60,00,000 = ₹60,000 per year

No input tax credit can be claimed, but compliance remains minimal and easy.

Conclusion

The Composition Scheme under GST is a smart option for small businesses that want to simplify their tax compliance, reduce the burden of filings, and focus on growth. With its low tax rates, easy return filing, and minimal paperwork, it supports India’s small business ecosystem and encourages voluntary tax compliance.

As your business grows, you can later migrate to the regular GST scheme to avail input tax credit and expand your operations.

Key Takeaways:

  • Ideal for small taxpayers with turnover up to ₹1.5 crore.

  • Simple return filing – only one quarterly and one annual return.

  • Reduced tax liability and improved liquidity.

  • Not suitable for inter-state or e-commerce sellers.

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